There remains millions of properties that are underwater!

Sam might Help!

New lender programs will let the borrower, deed the property to the bank.

The former(defaulting borrower) owner can stay in place and rent the home back.  The bank may provide an option to the owner that will permit them to buy the home in the future if certain terms and conditions are met.

 SAM’s are shared appreciation mortgages.

Many home owners are stuck because they are underwater.  There home might be valued at less than the mortgage due on it.   They owe more than it is worth.

Reducing investor losses by modifying mortgage terms, lower interest rates and reducing payments seems to only extend the problems.  People can’t pay the payments. The fundamental problem of a borrowers unsupportable debt load does not get fixed.

Investors (i.e. lenders) lose as much as 70% when a home is foreclosed upon.

There is an  emerging a solution! 

Lowering the debt seems to be a solution. 

Bank of America thinks such a strategy will help them as they slog through a huge inventory of unsold homes.  The “Too Big To Fail”  bank has started a limited program in hard hit markets that will allow defaulted home owners to rent the home they used to own.  Since they are living in it when the bank takes it back, staying in place and paying rent seems so much easier for everyone. Bof A will hold REOs and operate as a landlord for the time being, hoping to recover and profit from appreciated real estate values down the road.

Values are seeking equilibrium with rents.  It is setting up  a great transfer of wealth for investors to buy cheap, find a tenant and let them pay for the mortgage.  If inflation returns and rates go higher (both of which we predict to happen) Shared Appreciation Mortgages might save the economy.

Trying to rehabilitate borrowers by reducing the principal owed has shown to be a much better way for the investor and the homeowner to reach a stable footing.  Lenders that tried to work with delinquent borrowers by reducing the principal debt by as much as 26% were far less likely to have a foreclosure on their books.  If you save a home owner borrower, you save an investor… win/win.

Laurie Goodman, a nationally recognized housing analyst says that another 4.5 million mortgage holders have given up paying and are likely to lose their homes.  More could follow unless things improve.

Banks have been  reluctant to consider principal reductions because their fees are tied to the amount of the principal rather than the ultimate payback to investors.  They often hold 2nd mortgages for the loans they service.  Principal reductions typically require a total loss on those 2nd notes.

What about a SAM?

One trend that is starting to gain traction is called a “Shared Appreciation Mortgage”.   This special kind of mortgage could allow a homeowner to write down a portion of their mortgage debt, but at the same time, they are required to share future appreciation gains with those who helped them out.